Nonprofits Facing Heightened Scrutiny via IRS Criminal Investigation; Prosecutions May Soon Follow
Recently reported changes within the IRS' Criminal Investigation Division (IRS-CI) may result in investigations into the activities of tax-exempt organizations. These investigations are expected to focus on the "knowing" use and receipt of funds for activities that exceed the organization's charitable purposes, such as political campaign intervention or illegal activity.
Nonprofits should prepare for IRS-CI special agents, working with federal prosecutors, to use traditional law enforcement techniques - including grand jury subpoenas and search warrants - to gather evidence of potential tax crimes.
Now is the time for nonprofit donors and grantors to ensure that their grantees have policies and practices in place for complying with applicable law, and to assess any potential concerns, as well as a course of action, should they discover noncompliance.
Foreign and domestic nonprofits should carefully review their compliance programs to ensure that their policies and practices prevent any improper use or solicitation of donations. Tax-exempt organizations should carefully monitor this overhaul and prepare for potential enhanced IRS scrutiny.
IRS special agents, working with federal prosecutors, may soon begin interviewing taxpayers making or receiving tax-deductible donations or grants to determine if the taxpayers were aware of any actual, or "off the record" representations about an organization's misuse of funds.
Tax-Exempt Organizations
In general, tax-exempt organizations must operate primarily to benefit their charitable classes. While legislative lobbying and political campaign intervention may well benefit the charitable class, Congress has limited such activity as a condition of tax-exempt status.
What This Means for Charitable Organizations
To avoid or reduce potential exposure, nonprofits should develop or update compliance programs to ensure that their funds are being used in strict accordance with their nonprofit purpose and are not diverted to impermissible purposes. Organizations should also maintain policies and procedures, as well as internal controls, to prevent employees from using funds in a manner that can expose the organization to criminal investigation.
Conclusion
The IRS and DOJ have made no secret of their willingness to prosecute organizations and individuals pursuant to an industry probe.
This document is designed for general information only. The information presented in this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client.
For further information please contact me at www.kmckernanlaw.com kevin@kmckernan.com or 718-317-5007.